Treasuries fell for the first time in four days before the Federal Reserve ends a policy meeting amid speculation the central bank will maintain its bond-buying program, underpinning demand for higher-yielding assets.
Ten-year yields rose from a two-week low reached yesterday as Cyprus sought alternatives to the euro-area plan to help it avoid a banking collapse. The European Central Bank said it would provide liquidity as needed within its rules, easing concern the region’s debt crisis will worsen. The Federal Open Market Committee will release economic forecasts today as it issues a statement.
“It’s been the week of Cyprus,” said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, one of the 21 primary dealers that trade with the Fed. “That’s the key driver, and going into the afternoon it will be the FOMC. There’s a little bit more confidence that something will be reached. Treasuries are getting hit a little bit.”
Benchmark 10-year yields rose four basis points, or 0.04 percentage point, to 1.94% at 10:29 a.m. in New York, according to Bloomberg Bond Trader prices. The 2% note maturing in February 2023 dropped 11/32, or $3.44 per $1,000 face amount, to 100 17/32. The yields slid to 1.89% yesterday, the lowest level since March 5.
Treasuries lost 0.4% this year through yesterday, poised for the biggest quarterly decline since the three months ended March 2012, according to a Bank of America Merrill Lynch index. The Standard & Poor’s 500 Index of shares returned 9.1%, including reinvested dividends.
Less Costly
U.S. government securities dropped from the costliest level in two weeks. The 10-year term premium, a model that includes expectations for interest rates, growth and inflation, was at negative 0.69%, after touching negative 0.71% yesterday, the most expensive since March 5. A negative reading indicates investors are willing to accept yields below what’s considered fair value.
“You may see buyers on dips,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “The market will continue to be concerned with tape bombs coming out of Europe. Most people will expect the Fed to remain dovish.”
Chairman Ben S. Bernanke will probably start reducing the Fed’s $85 billion in monthly bond buying no earlier than the fourth quarter of 2013, economists said in a Bloomberg survey.
Fed Outlook
The Fed will halt its unprecedented easing in the first half of next year after expanding central bank assets to a record of about $4 trillion, according to median estimates by 46 economists surveyed March 13-18 before the two-day meeting of policy makers ends today. Unemployment will have fallen to 7.3% from its current 7.7% when the Fed starts to pull back on its buying, the economists said.
The Federal Open Market Committee plans to release a statement at 2 p.m. today in Washington and Bernanke is scheduled to hold a press conference at 2:30 p.m.
Ten-year yields dropped one basis point to 1.99% following the previous Fed announcement on Jan. 30, when policy makers pledged to keep purchasing securities at the rate of $85 billion a month.
Bernanke will ultimately buy a total of $600 billion in mortgage bonds and $545 billion in Treasuries in the round of bond buying that began in September, according to the median of responses in the March 13-18 survey.
U.S. reports tomorrow will show purchases of existing homes rose to a 5 million annual rate, the most since November 2009, according to a Bloomberg News survey of economists. Figures from the Commerce Department yesterday showed permits for future home construction climbed to the highest since June 2008.
Faster Growth
Laurence D. Fink, chief executive officer of BlackRock Inc., the world’s largest asset manager, said he sees faster growth in the world’s largest economy.
“If anything, we have migrated our view to a little higher” than the 2.5 percent-plus growth estimate, Fink said in a Bloomberg Television interview in Hong Kong. “If it wasn’t for Washington and the uncertainty that Washington has created, we’ll probably be navigating closer to 4%.”
Treasuries advanced yesterday after Cypriot lawmakers rejected an unprecedented levy on bank deposits, threatening to derail a rescue of the nation.
Luxembourg Finance Minister Luc Frieden called for the 17 euro-area finance ministers to reconvene “as soon as possible” to formulate a new package for the country. The ECB, whose Governing Council meets today in Frankfurt, will have to decide whether to give Cyprus more time or consider cutting off liquidity to the country’s banks. German Chancellor Angela Merkel, saying she “regrets” the Cypriot parliament’s decision, signaled a willingness to engage with Cyprus as long as its banks contribute to a bailout.
Moscow Talks
Cypriot Finance Minister Michael Sarris met in Moscow with his Russian counterpart and told reporters he’ll continue the talks “as long as it takes” as the island nation seeks to overcome the deadlock.
Russia, which granted Cyprus a 2.5 billion-euro ($3.2 billion) loan in December 2011, had been in talks on easing the terms before being left out of a European Union-led bailout that would see the levy imposed on depositors. President Vladimir Putin called the deal “unfair” and “dangerous” before the Mediterranean nation voted down the proposal yesterday.
